06 Lecture 6 - Evaluation of Alternatives This lesson...

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Evaluation of Alternatives This lesson covers the use of worth and efficiency measures to make engineering economic decisions. For each engineering economic decision, there is an exhaustive set of feasible mutually exclusive alternatives. These alternatives have a set of future consequences that results in a cashflow forecast for each alternative that can be assigned a present worth at a minimally attractive rate of return (MARR). As we have seen before, the cashflow set assigned to a business scenario is predicated on a series of assumptions about revenue, expense, depreciation, taxation, duration, etc. It is the goal of this lesson to reinforce the proper methods of generating business scenarios and evaluations so that the correct decisions are made. In most cases, the proper decision procedure is to select the alternative with the greatest present worth . Evaluation of Alternatives: Mutually Exclusive In economic decision making for engineers, each problem has a scope which is defined by the objective(s) of the business scenario as influenced by the constituencies that are discussed in Lesson 1. The engineer makes a set of simplifying assumptions to create a reference frame for the decision. Proper evaluation requires that the engineer generate a set of alternatives which are: Exhaustive : all alternatives that are technically feasible have been considered. Mutually Exclusive : if one alternative is chosen and implemented, it precludes all others. The following example shows an application of these concepts.
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Example: An insulated pipe carries hot oil and loses heat. Pipe insulation is available in integer- inch thickness from 1 to 5 inches. Question: Define the exhaustive set of feasible, mutually exclusive alternatives. Answer: There are six alternatives: Insulate the pipe with 0-inch insulation (Do nothing) Insulate the pipe with 1-inch insulation Insulate the pipe with 2-inch insulation Insulate the pipe with 3-inch insulation Insulate the pipe with 4-inch insulation Insulate the pipe with 5-inch insulation An important point to remember is that the first alternative in any set of alternatives is the "do-nothing" alternative. This alternative is always included because although a technical project may be technically feasible, it is not necessarily economically feasible. The "do-nothing" alternative provides an acknowledgement that the correct economic decision may be to "do nothing." Always include the "do-nothing" alternative in your evaluations.
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I know engineers have a bias to action. We like to make things work, to fix problems, to do something! In the final analysis of a decision, it may be that the return on capital does not justify any action.
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This note was uploaded on 05/12/2010 for the course BUSINESS BS515 taught by Professor Johnson during the Fall '09 term at Drexel.

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06 Lecture 6 - Evaluation of Alternatives This lesson...

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